Search Afrox integrated annual report 2017

LPG

Key highlights

Volume growth through ongoing investment in cylinders and infrastructure

Improved service levels

Key challenges

Full implementation of Competition Commission recommendations

Ongoing action against illegal fillers

Achievement of competitively priced imports into the Western Cape

Performance review

Key performance indicators

Key:

Target achieved: ✔

Target not achieved: ✖

Overview

LPG accounts for 35% of Afrox revenue and 24% of GPADE. Profitability was underpinned by secure import availability, strong pricing and margin management discipline, as well as strict cost management. The high ROCE level of this segment is maintained through effective capital allocation in priority investments. In addition, improved efficiencies in cost management, logistics and filling operations were achieved.

Unlike previous years, which were characterised by numerous unplanned shutdowns, 2017 was characterised by improved production stability at most local refineries, which further entrenched the Company’s positive position. Effective sales and customer support were the primary focus of our customer interactions in the year.

Security of supply

The 10.4% increase in volumes was achieved through long-term import agreements to deliver uninterrupted supply throughout the year, including peak winter demand. This security of supply improved Afrox’s position in the local and African LPG market, securing our market share. Imports constitute 23% of the Company’s LPG supply. Afrox is in a unique position to substantially increase supply from imports to cater for growing demand and any local supply shortages should this be necessary.

The Richards Bay facility is a third-party facility and remains our primary import hub. Two new terminals in Saldanha were commissioned to support our import capabilities. Demand in the Western Cape exceeds supply from local refineries. Thus, the balance has to be imported via the two import terminals. Afrox made consistent use of these terminals to sustain uninterrupted supply to the Western Cape customer base.

Competition Commission market inquiry

On 24 April 2017 the Competition Commission released the LPG Report and made recommendations to introduce new measures to improve competition in the LPG sector. These key recommendations are related to the market structure, pricing and supply agreements in the industry with different parties required to take certain actions. These include the wholesalers, refineries, DoE and NERSA. Afrox has welcomed the recommendations and where appropriate, have complied with proposals. However, we foresee a possible challenge in the implementation of these recommendations by all relevant parties within the time frames required.

Illegal cylinder filling

Illegal cylinder fillers continue to pose a significant threat to public safety. These rogue operators are highly competitive yet lack the competence or care to operate safely. Afrox has begun to receive increased support from industry participants and the Department of Labour in addressing this challenge. Primary activities take the form of public awareness campaigns that educate likely users on the risks associated with illegally filled cylinders. Afrox uses various media platforms to spread these messages and hopefully facilitate a reduction in illegally-filled LPG-related incidents.

Future focus areas

Afrox has a significant trading footprint throughout southern Africa, supported by the leading LPG brand, Handigas. The Company is well placed and will continuously seek to capitalise on new growth opportunities by creating long-term strategic alliances with upstream partners.

We have identified domestic customers in lower income markets to target with customised offers. Our existing customers are largely contracted, thus Afrox will endeavour to offer consistent supply, excellent service and engineering capabilities to retain these customers. Our sales team will endeavour to improve its already close relationships with customers and will receive ongoing sales training to support this. Electronic customer surveys, such as ‘The voice of the customer’, will assist in highlighting areas for improvement.

Our focus on improved internal efficiencies and cost management will persist. The Company is investigating new ways to reduce costs associated with distribution of LPG for bulk and cylinder vehicles.